This guide explains the core framework U.S. authorities use to decide if an offering is a regulated investment. The rule comes from SEC v. W.J. Howey Co., a U.S. Supreme Court decision that treated certain citrus grove arrangements as investment contracts because buyers put in capital, joined a common enterprise, and expected profits from others’ efforts.
The stakes are practical and immediate. Classification affects registration duties, disclosures, marketing, exchange listings, and how projects handle investor funds.
This section previews a clear, step-by-step approach to determine whether your offering could be a security. You will see the four-prong analysis — investment, common enterprise, expectation of profit, and reliance on others — and how to map evidence to each element.
Beyond labels, substance matters. The same framework now reaches digital projects and tokenized funds when transactions mirror an investment contract. The guide includes a practical checklist and an evidence log to support internal governance or counsel review.
What this How-To guide covers and who should use it
This practical guide helps founders, counsel, compliance leads, and product managers in the digital assets industry evaluate offers against U.S. laws governing marketed investments.
Who should use it: teams planning token sales, SAFTs, revenue-sharing programs, fractional interests, tokenized real‑world assets, or other instruments that might be offered to investors.
Coverage includes a plain-English breakdown of the Howey Test, a step-by-step method to apply the framework, state-law variations, recent crypto cases, and compliance planning under evolving regulation.
Use the guide to map product features to legal risks, update disclosures, or design remediation when characteristics could convert a utility into an investment. It also highlights common pain points like ambiguous marketing claims, whether purchasers rely on managerial efforts, and existence of a common enterprise.
- Plain breakdown and applied checklist for internal review
- Recent enforcement signals and industry case examples
- Cross‑functional steps to align product, legal, finance, and marketing
Practical value: follow these steps to document decisions, anticipate regulator focus areas, and reduce the chance that a launch will trigger registration or other compliance obligations.
Understanding the Howey Test under U.S. securities laws
The Supreme Court’s ruling in SEC v. W.J. Howey Co. set a durable rule for when commercial offerings act like investments under U.S. law.
The court addressed sales of citrus grove parcels that the company then leased, cultivated, and marketed for buyers who lacked farming expertise.
Although buyers held title to land, the arrangement pooled revenue and shared profits from company operations. The Supreme Court held that arrangement was an unregistered investment contract.
What the court defined
The ruling framed an investment contract as four elements: contribution of capital or value, a common enterprise, an expectation of profit, and profits derived from the efforts of others.
Investment is functional — not only cash. Courts treat other forms of value as contributions if participants expect returns.
Breaking down the four prongs
- Investment of money or value: a buyer puts in funds or other convertible value.
- Common enterprise: risk and reward are pooled or the promoter’s fate is tied to participants.
- Expectation of profits: marketing and economic design shape whether buyers seek gains, not use.
- Efforts of others: outcomes depend on ongoing managerial or specialized efforts by the promoter or company.
Courts look at economic reality over labels. Even direct ownership can mask an investment contract when the arrangement channels returns through promoter activity.
For modern offerings, regulators often find the first two elements met in token sales and similar models, making the focus whether buyers expect profits and rely on promoter efforts. For a plain overview of the doctrine see the Investopedia summary, and for crypto compliance implications consult industry guidance like this crypto compliance guide.
How to apply the Howey Test step-by-step
Work through each element with concrete evidence. Collect offering materials, on-chain records, and governance docs before you begin. Document findings so the analysis is auditable.
Prong one: Is there an investment of money or value?
Identify contributions: cash, crypto, services, or other value. Tie those funds to project capital needs or token issuance. Note any purchase terms or purchase agreements that create economic stakes.
Prong two: Does a common enterprise exist?
Look for pooled proceeds, shared returns, or mechanics that link investor fortunes to the promoter or protocol. Check treasury controls and allocation rules.
Prong three: Is there an expectation of profits?
Review marketing, tokenomics, revenue shares, burns, or buybacks. Statements promising returns create an expectation of profit for investors.
Prong four: Are profits derived from the efforts of others?
Map who controls upgrades, asset picks, and treasury keys. Ongoing managerial action that drives value suggests reliance on others’ efforts.
- Mitigations: narrow economic rights, avoid return-focused marketing, increase functional utility before sale.
- Document: contemporaneous memo mapping each prong and citing evidence.
| Element | Key Evidence | Red Flags |
|---|---|---|
| Investment money | Receipts, purchase agreements, token sale contracts | Upfront funding tied to returns |
| Common enterprise | Treasury pooling, shared revenue rules | Interdependent token economics |
| Expectation of profit | Marketing, buyback policies, revenue share | Promotional return claims |
| Efforts of others | Upgrade keys, governance limits, team control | Centralized management driving value |
Howey test securities in the digital asset and crypto context
In crypto markets, familiar legal standards are being stretched to cover novel token designs and sale mechanics. Regulators now focus on whether offerings involve pooled money, a linked enterprise, and promised returns that depend on others’ efforts.
Why Bitcoin is generally not treated as a security
Bitcoin is often viewed as a currency-like asset because development is decentralized and no single company raised public money to issue it.
That lack of issuer fundraising, plus broad use as a medium of exchange, makes courts and the SEC less likely to treat it as an investment contract.
Ripple/XRP: institutional sales vs secondary market sales
The 2023 Southern District of New York ruling drew a clear line: institutional sales of XRP met key factors, while many exchange-based secondary trades did not in that court’s view.
That split shows context matters — the same token can lead to different outcomes depending on how it was sold and promoted.
Ongoing SEC actions in crypto offerings and exchanges
The SEC continues enforcement against platforms and issuers, citing cases where token launches resemble traditional fundraising.
Agencies still press that many digital asset sales satisfy the money and common‑enterprise prongs, keeping regulation and litigation active.
Tokenization projects and managerial efforts
Tokenized assets can trigger closer scrutiny when a team selects assets, manages reserves, or curates operations that create value.
Practical point: investor materials and tokenomics that imply returns or centralized control increase the risk of enforcement and court challenge under the howey test.
- Takeaway: analyze sale mechanics, marketing, and who drives value before launch.
State law variations: risk capital tests and enforcement differences
Across the U.S., state frameworks sometimes capture transactions that federal doctrine would not.
Some states apply a “risk capital” approach that focuses on whether an offering solicits funds for a new business. That approach can sweep in offerings that lack traditional profit‑sharing features.
How state tests can diverge
Contrast: the federal standard centers on four prongs, while risk capital tests look to whether investors provided funds to finance a business venture.
Illustrative jurisdictions and recent allegations
States with explicit risk‑capital doctrines include Alaska, Michigan, North Dakota, Oklahoma, and Washington. Other jurisdictions that use related analyses include California, New Mexico, and Wisconsin.
The Oregon complaint against an exchange asserts the state’s approach “differs significantly” from federal doctrine, underscoring uncertainty in multi‑state operations.
Why enforcement structure matters
Enforcement tools vary: some states concentrate power in financial regulators, while others empower attorneys general. Those differences shape priorities, remedies, and negotiation leverage.
| Issue | State risk capital | Federal standard |
|---|---|---|
| Focus | Solicitation of business funding | Investment, common enterprise, profit expectation, managerial efforts |
| Likely captures | Early‑stage fundraising and business ventures | Offerings with pooled funds and promoter-driven returns |
| Enforcement actors | Regulators or attorneys general (varies) | SEC and federal courts |
Practical tip: map operations across states, engage local regulators early, and tailor disclosures to lower cross‑jurisdictional risk under both securities laws and state laws.
Building a compliance path: registration, exemptions, and practical safeguards
Start compliance planning by mapping whether your offer needs public registration or can rely on private exemptions.
When to file publicly or use private offerings
Consider Securities Act registration for broad public sales, large raises, or when resale liquidity is essential. The SEC continues reviewing draft registration statements for tokenization projects and some issuers still choose private placements under exemptions.
Use private offerings when audience limits, investor accreditation, and use-of-funds match exemption rules under the Act 1933 framework or other safe harbors.
Controls, disclosures, and operational alignment
Governance: implement treasury key splits, limits on upgrade authority, and conflict policies to reduce concentrated managerial control.
Disclosures: present realistic risk factors, clear use of funds, economic rights, and roadmaps that avoid implying guaranteed profit.
- Document decentralization and utility features to distinguish consumption from an investment.
- Draft contracts and platform terms to avoid embedding investment-like rights or pooled funds mechanics.
- Pilot limited-access programs to test utility before public distribution.
Practical note: align filings with the securities act and consider counsel when offerings border the howey test nexus.
Case signals to watch: lessons from Barry and other transactions
Recent rulings show that fractional ownership schemes can trigger classic investment law scrutiny when managers control key economic functions.
In SEC v. Barry (9th Cir. Aug. 11, 2025), the court held that fractional interests in life settlements were investment contracts. The company’s role in selecting policies and handling premiums proved central.
Why Barry matters
The decision stressed that expertise in asset selection and ongoing money management satisfied the managerial efforts prong. Investors lacked effective control because holdings were fragmented.
- Fractionalization plus promoter control creates reliance on others to generate profits.
- Centralized curation, reserve management, and premium payments are red flags for tokenized offerings.
- Courts may find a common enterprise when investors cannot direct operations.
| Signal | Why it matters | Action |
|---|---|---|
| Centralized selection | Shows reliance on company expertise | Document independent selection or automation |
| Cash management | Managerial work drives returns | Use third‑party custodians |
| Fractional ownership | Limits investor control | Enable governance rights or verifiable control |
Practical takeaway: fractionalized real‑world asset tokens and similar structures can pass the howey test when promoter functions, not market events, create value. Reduce risk by minimizing central levers, increasing verifiable automation, and documenting investor control.
Conclusion
Wrap up: the howey test remains the central legal yardstick to decide when an offering functions as a security. Look at economic reality: who contributes investment money, whether a common enterprise links outcomes, if profits are expected, and whether a company’s efforts create value. Document evidence for each prong and keep contracts and disclosures aligned with those facts.
Practical takeaway: Bitcoin often does not pass howey test, but many cryptocurrencies and tokenized digital assets can, depending on structure and promotion. Favor a compliance-first approach: consider Securities Act routes or exemptions, tailor disclosures, and map state law risks. Clear design choices and contemporaneous records lower the chance of an adverse result and support durable innovation.
FAQ
What is the basic purpose of the Howey Test Securities guide?
This guide explains how courts determine whether an offering qualifies as an investment contract under the Securities Act of 1933. It helps founders, legal counsel, compliance officers, and crypto teams evaluate whether a transaction may be regulated and what steps to take to reduce legal risk.
Who should use this how-to resource?
Use it if you issue tokens, sell fractional interests, raise capital from the public, or advise clients on capital formation. It’s also useful for exchange operators, registered broker-dealers, and in-house counsel assessing registration obligations or exemptions.
What did the U.S. Supreme Court say in SEC v. W.J. Howey Co.?
The Court defined an “investment contract” to capture schemes where people invest money in a common enterprise with an expectation of profits largely from the efforts of others. That decision remains the cornerstone for deciding whether an offering falls under federal securities law.
What are the four prongs used to evaluate an investment contract?
Analysts look for (1) an investment of money or value, (2) a common enterprise linking investors, (3) a reasonable expectation of profits, and (4) profits arising from the managerial efforts of third parties rather than the investor’s own actions.
How do you determine if there is an investment of money or equivalent value?
Courts count traditional cash investments and contributions of assets, services, or crypto that have real economic value. The key is whether the investor commits resources with the intent of participating in the offering’s economic returns.
What indicates a common enterprise exists?
A common enterprise appears when investors’ fortunes are tied together or pooled, often reflected in pro rata sharing, contractual links, or centralized control of assets or revenue by the sponsor or platform.
How is a reasonable expectation of profits evaluated?
Courts consider marketing, disclosures, historical performance, and how returns are structured. Promises of passive returns, yield, or appreciation—especially when emphasized in offering materials—support an expectation of profits.
When are profits considered to come from the efforts of others?
Profits derive from others’ efforts when promoters, managers, or a central team perform essential tasks—development, marketing, or management—such that investors depend on their skill to generate returns.
What evidence should be collected during analysis?
Document purchase agreements, marketing materials, token economics, governance terms, revenue-sharing clauses, operational roles, and communications with buyers. Collect transactional records showing fund flows and any representations about returns.
How does the test apply to digital assets and cryptocurrencies?
Evaluators focus on whether token holders expect profits from a promoter’s efforts. Open, decentralized networks like Bitcoin generally lack centralized profit expectations, while many token sales with fundraising, promises, or ongoing development oversight raise firm regulatory concerns.
Why is Bitcoin typically not treated as a security?
Bitcoin functions as a decentralized, widely distributed asset without a central promoter promising profits from managerial efforts. That independence weighs against finding an investment contract under the U.S. framework.
How do institutional sales differ from secondary market sales for tokens like XRP?
Institutional or initial distribution sales often include contractual terms, escrow, or centralized controls that suggest an offering of an investment. Secondary market trades among independent holders usually lack those characteristics and are less likely to be treated as regulated offerings.
What ongoing SEC actions should crypto market participants watch?
Watch enforcement against token issuers, platforms, and intermediaries alleging unregistered offerings, as well as rulemakings affecting exchanges, custodians, and lending services. These actions clarify how agencies apply the investment-contract framework.
How do state laws differ from the federal approach?
States can apply broader or different standards, like the risk-capital test, and enforcement priorities vary by regulator. Some states focus on consumer protection and may pursue actions even where federal law does not reach.
When should an issuer consider registering under the Securities Act of 1933?
Consider registration if the offering meets the four prongs and you plan wide distribution to the public. Registration provides disclosure and safer legal footing but requires ongoing reporting and compliance costs.
What exemptions might be available for private offerings?
Common exemptions include private placement rules and accredited investor exceptions. Relying on an exemption still requires careful documentation, investor qualification, and adherence to transfer restrictions.
What operational controls and disclosures help mitigate regulatory risk?
Clear whitepapers, accurate marketing, robust KYC/AML, defined governance, limited promoter control, transparent token economics, and independent audits reduce the likelihood that an offering will be viewed as a passive investment dependent on promoters.
What case signals should issuers watch for in enforcement trends?
Cases that highlight reliance on others’ expertise, contractual profit-sharing, or centralized management are red flags. Recent decisions involving fractional interests and platform-led distributions show regulators focus on structural indicators of investment arrangements.
How do fractional ownership offerings affect the analysis?
Selling fractional interests often suggests pooled economic exposure and dependency on manager expertise, making it more likely the offering will be treated as an investment contract under federal and state frameworks.
How can a company document its analysis to withstand scrutiny?
Maintain a written compliance memo explaining each prong, collect marketing drafts and approvals, record investor communications, preserve governance records, and obtain legal opinions when appropriate. Clear contemporaneous records show intent and reasoning.
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